Opinion
Crude comfort: Let's not lose sleep over India’s rising oil dependency
Summary
- A big cushion of foreign reserves and relatively stable oil prices despite fraught geopolitics imply we need not get anxious about imports nearing 90% of consumption. Back in 2015, India had aimed to bring it down to 67% by 2022, but the case for import substitution is no longer very compelling.
India’s reliance on imported crude oil is getting worse. The latest government data shows that the country imported 88.2% of the oil it consumed in the first half of 2024-25, up from 87.6% a year earlier.
Such a high import dependency would disappoint policymakers who have been trying to increase our self-reliance in the energy sector. To that end, in 2014-15, the government had set a target of reducing our oil dependency to 67% by 2022.
Since the import proportion was 77% in 2013-14, a reduction of 10 percentage points may have seemed like a reachable aim back then. But the share of imported oil in Indian consumption has gone the other way over the past decade.
This exposes our economy to global price shocks, in addition to the risk of supply disruptions. Oil price upshoots usually widen India’s trade and current account deficits, soak up that much more foreign exchange, weaken the rupee, and fuel domestic inflation. Previous major episodes have been scary.
Also read: The war in West Asia is escalating, so why aren’t oil prices shooting up?
It was an oil crisis caused by the 1990-91 Gulf War that left India short of US dollars and moved us away from our post-1947 ‘mixed economy’ model.
As we needed hard currency for oil shipments, we learnt the hard way that globalization was a must. When oil hit $147 per barrel in mid-2008, we took another economic blow, though a far milder one.
Significant changes have taken place since then. The Russia-Ukraine War is in its third year, with stiff Western sanctions on the former, an oil producer. The Gaza War that began last October has threatened to engulf large oil fields in West Asia, with Israel-versus-Iran hostilities on a short fuse.
Yet, the oil market has stayed relatively calm for the most part. Despite recent Israeli air strikes on Iranian military targets, Brent crude was trading at under $72 a barrel on Monday, down 5%, perhaps in relief that Tel Aviv did not attack Iran’s oil infrastructure and Tehran played down the damage.
The commodity has traded mostly below $80 this month, even though West Asia’s theatre of war enlarged to include Lebanon. One big reason could be a cap on prices placed by US shale output, which is seen to spurt in response to price signals at the $75-plus level.
On the whole, global supplies seem steady, with Iranian and Russian oil finding takers and American shale frackers having weakened the lever that oil-cartel Opec+ once had on prices.
India has been getting tanker-loads from Russia and is looking to import oil from countries as far off as Brazil. All of it at a cost that doesn’t pinch. Even if it did, our forex reserves of $688 billion provide an impact buffer.
Also read: Oil Rises as Israel Plans Next Iran Move After Weekend Attack
All these factors have raised India’s energy security. Sure, it is preferable to be self-reliant, but our own oil output has been unable to keep up with rapidly rising demand and renewable alternatives will take time to make an impact.
In all, reducing our import reliance does not look feasible. So long as oil flows in smoothly, that should not cause us anxiety. By the theory of trade, we should focus on what we produce best and buy from others what they supply cheaper.
For decades, this logic applied poorly to oil, whose market was distorted by a cartel that kept prices artificially high by controlling a big chunk of global production. It made sense to pump out local oil even if it proved a costly enterprise.
Although Opec+ is not powerless and wars can still be disruptive, the case for investing in oil fields at home—unless we find a clear cost advantage in global comparison—is significantly less compelling today.
